“Recall, the EU economy slipped back into recession in 2012, the dreaded double-dip that the U.S. managed to avoid. Real economic output in the region remains three full percentage points below the peak before the 2008 recession, even as U.S. GDP advanced 1.9 percent last year.

“EU finances are in even more dismal shape than the U.S. European household debt, for example, was higher at the end of 2013 than it was before the 2008 credit crisis. And consumer spending across the EU, the lifeblood of its economy, was lower in 2012 than at the peak in 2008.

“It’s clear that deflationary pressures still have the upper hand in Europe, and the region cannot afford the added stress of a geo-political crisis. The EU financial system is already beginning to show stress cracks.”

He stressed how the euro was about to plunge, how growth in Europe remains moribund and how their policymakers are increasingly worried about the risks of deflation. And he’s been continually issuing similar warnings ever since.

How did they see this coming? And what is likely to happen next?

On a quest for answers, let me turn the clock back a couple of years and describe what we witnessed then …

Suddenly and without warning, they’re joined by Italy, and now the PIGS are renamed PIIGS — Portugal, Ireland, ITALY, Greece and Spain.

Global investors dump their government bonds like hot potatoes. Bond yields in some EU countries soar to as high as 30 percent.

Riots and demonstrations sweep the continent.

It is feared that the euro and all of Europe will collapse into a heap of financial, economic and social chaos.

In response, new sovereign debt bailouts are arranged in great haste, and earlier bailouts are beefed up with even greater haste.

Meanwhile, the European Central Bank embarks on a monetary expansion that, in some aspects, makes the downpour of Fed Chairman Bernanke’s helicopter money seem like a slow drizzle: They pour out loans in massive quantities.

In Germany, however, the deep memory of hyperinflation cannot be erased. And it surfaces to the collective cerebral cortex in the form of stubborn German opposition to monetary and fiscal madness.

Despite this, the ultimate consequences of the debt crisis are so frightening, German authorities in Brussels are outshouted and outvoted. The European Central Bank proceeds to push its monetary policy to new frontiers never explored before — even loans at below-zero interest rates.

On the fiscal front, however, the Germans do prevail to some degree: They insist on — and get — critical concessions from the other countries regarding budget cuts and fiscal controls.

From the melee, a so-called “crisis solution” finally emerges, and it has three elements:

Bigger bailouts.

Massive ECB loans.

Some budget cutting.

The financial markets calm down. Investors return. And the crisis is said to have ended.

“But,” we ask, “is the European debt crisis really over?

“What will be the financial consequences of their unbridled money pumping and sub-zero lending?

“What will be the political consequences of budget cutting imposed on PIIGS and other countries by outside powers?”

Fast forward to today and you can begin to find the answers …

The 2014 Scene

I’ve already told you Larry’s answer to the first question: No! It was merely disguised and covered up, while it morphed into crises of different colors and shapes:

The great national debt burdens were partially restructured, not reduced. Social welfare laws of PIIGS and other nations were repurposed, not repealed. And mass dissatisfaction with high unemployment was repressed, not resolved.

Mike Burnick gives us the answer to the second question: The consequence of wild central bank money lending is $500 billion to $1 trillion of excess cash sitting in European bank accounts, earning negative real interest rates.

This money, in turn, threatens to turn into one of the largest capital outflows in the history of financial markets — money fleeing stagnant Europe in search of safer and higher-yielding havens in the U.S. and elsewhere.

And Mike Larson gives us the answer to the third question: The consequence of budget cuts imposed from the outside is mass unemployment and political upheaval.

That’s why voters in PIIGS countries are shifting their allegiance, en masse, to parties that support renegotiating, reneging and even defaulting on their bailouts.

That’s why there is a sudden, new push throughout Europe — even including some groups in Germany — for massive new fiscal spending.

And that’s why yesterday was the worst day in the financial history of European bond markets since its great debt crisis of 2012. Bond investors fear that all of the fiscal deals will be breached, that bailout agreements will be torn up, some of the PIIGS will default, and the entire EU/euro experiment will come unglued.

How will we know if that is really going to happen?

Watch France.

France is still considered one of the “core” euro-zone countries, and its economy is the largest after Germany’s.

But France is beginning to look more and more like a PIIGS country — big national debts, high-risk megabanks, pervasive and persistent social welfare laws, rising unemployment and malaise. Plus, in terms of policy, they are already there.

France’s leadership has already shifted from the German camp favoring fiscal repentance and restraint to the PIIGS camp favoring fiscal sin and folly.

And for the nearer term, watch Greece.

As I said, Greek government bond yields soared to nearly 9 percent on Thursday, amid growing fears that Greece’s bailout may fall apart.

Stocks in Athens plunged 9 percent on Wednesday alone, and are already down 25 percent so far this year. The Greek unemployment rate has surged to a staggering 25 percent, prompting a power struggle within the Greek government that threatens to sabotage its bailout.

Bottom line: Europe is in a confirmed bear market. But the United States is not.

Good luck and God bless!

Martin

{18 comments }

HowardMonday, October 20, 2014 at 8:20 am

Hi Martin
Because I don’t know how this game of chess is going to play out with some certainty, I have now pulled half my assets out of risk and into cash. Yes some small profits but no risk. I’m not going to invest in this mess at the moment until I can see a path forward.

john doyleSunday, October 26, 2014 at 3:40 am

They might do a Cyprus on your cash.

MaxMonday, October 20, 2014 at 10:39 am

Martin,
I sold all my stocks, what little I had left and put in cash. Signed up with Martin’s Ultimate Portfolio and Gold and Silver Trader.
I am going to follow these recommendations to the letter. Neither one are doing very good to start with. I figure this is the only way I will ever recoup any of my losses. Know I am hoping Martin or Larry, or both of them, restore my retirement. Counting on both of you to come through for me this year.

wereMonday, October 20, 2014 at 4:30 pm

this is a joke, right?

zzzzzMonday, October 20, 2014 at 11:24 am

you people have cried wolf so many, many times – each with one of your investment offers attached. Then no accountability on how they’ve performed. I just don’t trust you people any more – even if you eventually prove to be right.

Herbert EverstijnSaturday, October 25, 2014 at 5:12 pm

I agree to some extent. However I see that Dr. Weiss is treading VERY carefully.
Although. I don’t think I will ever see the flabbergasting profits he had in the past (I am 79), but he (we) is doing better than the market as a whole. (And my past performance in particular)

CarmanMonday, October 20, 2014 at 1:08 pm

You say the US GDP is up, but is it really? Awhile back I read that they changed the way they calculate it so that things look better. Like most stats now, everything is manipulated. I for one don’t believe any of them.

Herbert EverstijnSaturday, October 25, 2014 at 5:14 pm

Couldn’t agree more

stephen nordstromSaturday, October 25, 2014 at 10:22 pm

Yeah, can you really call it GDP when government hugely deficit spends to pay for it….seems more like a Ponzi scheme.

HowardWednesday, October 22, 2014 at 12:34 am

Hi Martin

It appears to me that one of the main reasons we are heading into the war cycles on a global basis is because the middle classes have become less engaged, both politically and motivated economically. This is largely because their voice is being ignored by the powers that be, in favour of two other interest groups. These two groups are now engaged and very powerful politically. The first could be the ones who for one reason or another feel entitled as though they have contributed in some way already, or are two lazy to get off it and work for a better way of life. The second are all the splinter groups or causes that are pulling apart what middle America and all other developed world economies middle classes, have built up or believed to be some sort of middle ground. A middle ground where not every one gets their way and everything they want, but are prepared to try and get along just the same. A place where the middle classes understand the ground rules and are prepared to work within these boundaries that were established to find a future for their children. The lurching into crisis is due to an erosion of these middle class values and little or no representation.
Whether it’s big banks wanting faster profits or gays wanting to turn unions into marriage to facilitate adoption, (just two examples) society is tearing itself apart because splinter groups want more than the rest of society is able to offer. Ultimately the ones who really care and give a stuff about a normalcy bias, are crushed into giving up ground. We are destined to have a WAR, not because we all don’t want one, but because the fight for peace, in a world of manipulated markets and unrepresentative politics is becoming too darn hard. Rising global debt and collapsing markets won’t make it any easier. We are reaching a point where it is getting harder to turn it around; and fewer people are caring anymore now anyway.

Herbert EverstijnSaturday, October 25, 2014 at 5:36 pm

Howard is trying to cover such an enormous area, that I would not know where to start my comment . KIS ! I don’t trust either political party to any large extent. Therefore I hope their power is balanced so that neither one can execute their extreme projects.

terry sheadSaturday, October 25, 2014 at 12:44 pm

Can’t you see Europe is going to collapse, in fact the lot are going to fold, even us in the uk, what happends when we like the usa can’t get any one to lend us currency, how are we going to pay are bills.

johnSaturday, October 25, 2014 at 5:39 pm

Can I see the data that your analyzing that informs you that Europe is collapsing . I dont see the data that provides you withe evidence./ Greece and Portugal have been in difficulty for some time/Ireland has successfully exited the programme and the economy is growing again and unemployment is falling/ Uk looks to be in good shape.
Can you put up the data that you are reviewing other than some press reports that makes your predictions credible .

stephen nordstromSaturday, October 25, 2014 at 10:25 pm

Gee John, who believes the data anymore?

Sean Mac cumhaillSunday, October 26, 2014 at 8:18 am

The rapid recovery of Ireland has surprised Europe. Just copy us and Europe will rapidly recover.

Enda Kenny should be co opted by the EU !

Creativity is what is. Needed. Enda has that in spades!

GRBSunday, October 26, 2014 at 9:55 am

The best advice I have for all of you money bags, with millions invested in the world markets is : DUMP ALL YOUR BONDS. Why?, because all the sovereign nations with TRILLIONS of outstanding bonds, have NO CHOICE but to get together soon at the UN, and pass a resolution to cancel and forgive all debts to each other, and screw the private holders of Bonds at the same time. By Presidential Decree, citing it as a matter of national security, you will eat your bonds, and be deposessed of some of your riches, but will still be richer than anybody else. The common people and the poor will love it. Heck, they can even invoke the Biblical millennial debt redemption mandate, to justify screwing you. It’s a political win/win solution to save the world economy….., followed by a NEW DAY.

Things will get really interesting when the Arctic Inversion becomes more common in your region. You’ll have to figure out how to stay warm, keep your plumbing from freezing, keep your roads plowed on top of paying your bills & buying food.